Quarterly Market Review: January-March 2015

The Markets

Volatility continued to rule the domestic equities markets. After losing ground in January, the major indices had a strong February. March saw early losses, then solid gains, with the Dow industrials, S&P 500, and Russell 2000 all hitting closing highs, and the Nasdaq closing above 5000 for the first time in 15 years, just shy of its all-time high. But these gains were tempered by a late-month downturn, with all the major indices losing ground in five of the last seven trading days as investors, jittery about corporate earnings, took profits. The small caps of the Russell 2000, which are seen as having less international exposure, saw March's only gains, and also led all indices for the quarter, up almost 4% with the Nasdaq right behind at
3.5%. The S&P and Global Dow trailed, up .4% and .7% respectively, while the Dow industrials slipped into negative territory for the year.

The Fed's slower-than-expected approach to interest rate hikes caused a sharp but temporary drop in the U.S. dollar, which continued to gain strength during the quarter against the currencies of its major trading partners. While a strengthening dollar was good news for Americans traveling abroad last quarter, it added to investor angst because of the potentially adverse effects on the global profits of U.S. multinational corporations. In January, the benchmark 10-year Treasury note dropped below 2% for the first time since May 2013, with demand driving yields to as low as 1.68% that month, before stabilizing to end the quarter just under 2%.

Oil prices fell below $50 a barrel during the quarter, but that seemed to be a mixed blessing. Lower gas prices boosted consumers' spending power, but the sharp declines also raised questions about whether prices would fall so far that energy companies would cut back on jobs and/or ongoing operations. Even escalating tensions in the Middle East caused only a temporary spike back over $50, with U.S. spot crude prices closing the quarter under $48 a barrel, due to concerns that lifting sanctions against Iran could cause an increase in already abundant oil supplies. Gold, meanwhile, despite spiking to $1,300 in late January, finished the quarter almost exactly where it started, at roughly $1,183 an ounce.

Market/Index

2014 Close

Prior Month

As of March 31

Quarter Change

YTD Change

DJIA

17823.07

17776.12

-1.97%

-0.26%

-0.26%

NASDAQ

4736.05

4900.88

-1.26%

3.48%

3.48%

S&P 500

2058.90

2067.89

-1.74%

0.44%

0.44%

Russell 2000

1204.70

1252.77

1.57%

3.99%

3.99%

Global Dow

2501.66

2518.18

-2.47%

0.66%

0.66%

Fed. Funds

0.25%

0.25%

0 bps

0 bps

0 bps

10-year Treasuries

2.17%

1.94%

-9 bps

-23 bps

-23 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Quarterly Economic Perspective

The Fed has lost its patience. That's the main headline of the quarter, as the Federal Reserve finally removed long-standing language from its monthly statement of monetary policy that it would be patient about moving away from a near-zero interest rate environment. While this means the Fed is closer to raising interest rates, Fed Chair Janet Yellen indicated any increase wouldn't happen before June, and in any event not until warranted by economic data. The Fed indicated that rate increases would likely occur later, and at a more gradual pace, than previously forecast due to more moderate growth expectations.

The Bureau of Economic Analysis's final figures confirmed that U.S. growth slowed in 2014's final quarter, dropping from 5% in Q3 to 2.2%. That meant GDP increased 2.4% over all of 2014. The 4.4% increase in consumer spending was the biggest quarterly gain since the first quarter of 2006, but a 12.2% decline in federal defense spending and a 10.4% increase in imports helped offset it. Meanwhile, a 1.6% drop in the quarter's after-tax corporate profits (adjusted for inventories and capital consumption) contributed to an 8.3% annual decline for 2014--the worst year for profits since 2008.

The U.S. economy added 295,000 jobs in February, which helped cut the unemployment rate from 5.7% to 5.5%. The Bureau of Labor Statistics said February's job growth exceeded the 266,000 monthly average for the last year. Hourly wages were up 2% from a year earlier.

Sales of existing homes rose 1.2% in February (4.2% higher than a year earlier, according to the National Association of Realtors) but ongoing low inventories of homes for sale pushed prices up once again. New home sales also were up by 7.8% in February, and the January figure was revised upward. The Commerce Department said that put sales almost 25% higher than last February, and the 539,000 annual sales rate for new single-family homes hasn't been that high since February 2008.

After 3 months of falling consumer prices, consumer inflation turned up 0.2% in February. The Bureau of Labor Statistics said energy, food, and housing costs all contributed to the monthly increase, which left the inflation rate over the last 12 months essentially flat.

A 1.4% drop in February durable goods orders--the third decline in the last four months--confirmed a winter slowdown in the economy. More troubling was a 2.6% slump in business spending on capital equipment.

In March the European Central Bank commenced a long-awaited quantitative easing program worth at least €1.1 trillion ($1.3 trillion) to try to stimulate the sluggish economy there. The euro, pressured by QE and uncertainty about Greece, posted the largest quarterly loss versus the dollar since 2008.

Greece's anti-austerity opposition party Syriza, led by Alexis Tsipras, topped vote-getters in January's parliamentary election and formed a coalition government with another anti-austerity party, the Independent Greeks. The election raised concerns about Greece's willingness to go along with conditions imposed by its creditors after bailouts in 2011 and 2013, and the possibility of a default and "Grexit" from the eurozone. By March, Greece was struggling to satisfy creditor demands for detailed economic reform plans, in order to qualify for the next round of bailout funds. Reuters reported that without those funds, Greece will run out of money by April 20.

China cut its growth forecast for 2015 to 7%; Premier Li Keqiang cited underutilization of manufacturing capacity, slowing investment growth, potential deflation, and the need for increased public spending on social services. Though most developed economies would be thrilled with 7% growth, it's lower than
2014's 7.4% increase.

Eye on the Month Ahead

Domestically, all eyes will be on Q1 earnings and, equally important, any forward-looking guidance, to gauge the strong dollar's impact on future overseas profits. GDP, housing, and labor data will be watched closely to glean any possible clue about the timing of Fed interest rate hikes. Overseas, the Yemen situation, nuclear negotiations with Iran, and Greece's ongoing negotiations with its creditors will be monitored. Finally, as the "sell in May, go away" season approaches, equities could see continued market
turbulence.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

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